A law passed to stabilize the U.S. banking system after the Great Depression
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The Emergency Banking Act of 1933 was enacted during the Great Depression to alleviate the economic downturn and stabilize the U.S. financial system.
Summary
- The Emergency Banking Act of 1933 was enacted to stabilize the banking system after the Great Depression.
- The legislation increased presidential powers during the banking crisis, allowed the Comptroller of the Currency to restrict banks with impaired assets from operating, provided for additional bank capital through the Reconstruction Finance Corporation, and permitted the emergency issuance of Federal Reserve Bank Notes.
- Depositors re-deposited two-thirds of withdrawn funds, and stock markets reacted positively following the implementation of the law.
History of the Emergency Banking Act
During the Great Depression, many loans that were made by banks in the 1920s were not repaid. As loans remained unpaid, banks failed, and depositors lost their money. Therefore, people started withdrawing money from their bank accounts as they lost trust in the integrity of the banking system.
Even though many states in the U.S. wished to restrict the withdrawals, people no longer trusted the domestic banking system and considered it risky to keep their money with the banks. The Emergency Banking Act of 1933 provided a solution to the problem.
The bill was drafted under former U.S. President Herbert Hoover but wasn’t brought into action in his administration. Former U.S. President Franklin D. Roosevelt (1932-1945) implemented the law to deal with the increasing number of bank runs. Following his inauguration, Roosevelt called a session of the Congress and declared a four-day holiday for all banks in the country.
Shortly after, he addressed the nation in his first fireside chat regarding his decision to implement the legislation. He explained that the law was a rehabilitation program for America’s banking facilities. He also pointed out that the four-day holiday would allow for the inspection of financial operations of the banks by the Treasury Department.
The Federal government planned to restructure banks, and the financially solvent ones would be re-opened. The fireside chat was intended to reassure the masses that their money would be safe with the banks. Roosevelt reinstilled public confidence by emphasizing that it would be safer to deposit money when the banks reopened rather than keeping it under the mattress.
The Emergency Banking Act Explained
The legislation was divided into five sections :
Title 1
Title 1 increased presidential powers during a banking crisis to include the supervision and control of all banking functions, such as foreign exchange transactions, credit transfers between financial institutions, payments by financial institutions, and activities related to gold or silver.
Title 2
Title 2 extended some powers to the Office of the Comptroller of Currency (OCC). The OCC is an independent division within the Treasury Department, responsible for overseeing all aspects of the management of financial institutions such as capital requirements, liquidity, market risk, compliance, etc.
The legislation allowed the OCC to limit the operations of banks with impaired assets. A conservator would be assigned to the banks, who would closely monitor their functioning.
Title 3
Title 3 gave the Secretary of Treasury powers to decide if a bank needed more capital to sustain itself. If more capital was needed, the bank could procure it with approval from the U.S. president. After receiving the president’s approval, the bank could issue preferred stock or seek loans backed by preferred stock from the Reconstruction Finance Corporation.
Title 4
Title 4 allowed the Federal Reserve to issue Federal Reserve Bank Notes on an emergency basis. Federal Reserve Bank Notes comprised currency secured by financial assets of commercial banks.
Title 5
Title 5 allowed the Emergency Banking Act to be effective.
Milestones Achieved by the Emergency Banking Act
- The Emergency Banking Act was historic in that it gave the U.S. president powers to act independently from the Federal Reserve in times of a financial crisis.
- Section 1 and 4, combined, took the United States off the gold standard.
- The Emergency Banking Act was followed by the Banking Act, which introduced the Federal Deposit Insurance Corporation (FDIC). The FDIC provides insurance to depositors in US banks.
Public Reception
The passing of the Emergency Banking Act and the Federal Reserve’s commitment to supply currency to reopened banks created a 100% deposit insurance, which strengthened the confidence of depositors who were guaranteed the safety of their deposits.
After the banks reopened, lines of customers waited outside the banks to redeposit their money. Customers redeposited approximately two-thirds of their withdrawn cash, which marks a significant rebound in depositor confidence.
Even the stock markets reacted positively to this news. After the Emergency Banking Act was implemented, the New York Stock Exchange (NYSE) recorded its highest one-day percentage increase in prices, with the Dow Jones Industrial Average gaining about 15%.
Additional Resources
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- Dow Jones Industrial Average (DJIA)
- Economic Expansion
- Gold Standard
- Recession
- See all economics resources
